LLC and S Corporation Tax Elections
Similar to how a corporation elects S corp status, a single-member LLC can become an S corporation by filing IRS Form 2553. The LLC must file the election no later than two months and 15 days from the start of the tax year in which the S corp status will be effective.
Can a single member LLC elect to be taxed as an S corp? The default federal tax status for a single-member limited liability company (SMLLC) is a disregarded entity. However, the owner of an SMLLC can elect to have the business taxed as either a traditional C corporation or as an S corporation.
S Corporation Termination and Transition
- What causes an S corp to terminate? An S corporation election may be terminated involuntarily if the entity ceases to qualify as a small business corporation or its passive income exceeds the passive income limitation.
- What happens when an S corp terminates? In some situations, a company can take advantage of S corp. taxation despite filing the form late. A tax professional can advise you on timing, how to convert an LLC to an S corp., and how to prepare and file LLC as S corp. taxes.
Considerations for LLC vs. S Corporation
- Whether you’re setting up a new LLC or you’ve been in business for a while, it’s worth considering whether a multi-member or single-member LLC to S corp. conversion will save you money. It can be a complicated equation, so it’s a good idea to run the numbers and get legal and financial advice before you decide.
- The answer to LLC vs S corp debate depends on your individual circumstances. There are pros and cons to LLCs and S Corps, so you’ll need to weigh the benefits and drawbacks of each before making a decision.
Electing C Corporation Status
- Can a single-member LLC elect C Corp status? You can file an election for corporation tax status at any time after setting up your SMLLC. However, there are limitations on when the election can take effect. To make the election, complete and file IRS Form 8832, Entity Classification Election.
LLC and S Corporation Comparisons
- What Is an S Corp? An S Corporation refers to the tax classification of the business. It is a company that, by meeting certain requirements, can be taxed as an S Corporation.
- Formation flexibility is an advantage of LLCs, allowing for a single or multiple members. LLCs can also choose to be taxed as a sole proprietorship, partnership, S Corporation, or C Corporation.
Converting from LLC to S Corporation
- Converting from LLC to S-corp in terms of taxation can be done using Form 8832. By filing Form 8832 with the IRS, you elect to have your LLC taxed as an S-corporation rather than as an LLC.
Tax Implications and Considerations
- Is it better to be an LLC or corporation? The choice between an LLC and S-Corp depends on specific circumstances. An LLC offers more flexibility, while an S-Corp can save on self-employment taxes.
- How much does it cost to convert from LLC to S corp? Reducing your tax bill is the primary reason entrepreneurs elect to have their LLC taxed as an S-corporation.
Transition Process and Requirements
- Do you need a new EIN when converting LLC to S corp? When converting an LLC to an S Corporation, you’ll need to file Form 2553 with the IRS and adjust formation documents with the state. However, a new EIN is not required for the newly-formed S-Corp.
Additional Information on LLC and S Corporation Conversion
- The next step is to file Form 2553 with the IRS by March 15th to operate as an S Corporation. If you miss the deadline, you may still request S Corporation status but need to provide reasonable cause for the delay.
- Perhaps you’ve even decided that the time has come for this change. While some states provide a formal conversion process, others require a workaround. It’s essential to understand how the transition from an LLC to an S Corp affects your business.